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1.Dunder Mifflin Paper Company is considering purchasing a new stamping machine

ID: 2651819 • Letter: 1

Question

1.Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce cash inflows of $100,000 each year at the end of years 1 through 5, then at the end of year 7 there will be a cash outflow of $250,000. The company has a weighted average cost of capital of 11% ( use this as the reinvestment rate), What is the MIRR of the investment?

2. Artie's Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and will generate annual free cash inflows of $1 million per year for 8 years. Calculate the project's MIRR given:A) A required rate of return of 10% B) A required rate of return of 13% C) A required rate of return of 14%

3. Calculate the MIRR given the following casg flows if the appropriate required rate of return is 12%(use this as the investment rate)

4. You are considering a project with the following cash flows:

If the appropriate discount rate is 8%, what is the projects discounted payback period?

5. Your investment advisor has offered you an investment that will provide you with one cash flow of $152,000 at the end of 35 years if you pay premiums of $250 per year at the end of each year for 35 years. Find the internal rate of return on this investment.

Year Cash Flow 0 -40000 1 35000 2 35000 3 35000 4 -35000 5 35000 6 35000

Explanation / Answer

Answer No. 4

Figures in $

Year

Cash inflow

Disc Rate - 8%

Disc. Cash inflow

Cumulative Disc. cash inflow

A

B

A*B

1

25000

0.93

23148.15

23148.15

2

25000

0.86

21433.47

44581.62

3

25000

0.79

19845.81

64427.42

4

25000

0.74

18375.75

Discounted cash inflow

82803.171

Project’s initial investment is $ 60,000. So payback period is period by which initial investment is recovered (i.e. $ 60,000). In Discounted payback period, Cash flows for future periods are discounted to find its present value. Here cumulative discounted cash flow at year 2 end is $ 44581.62 and cumulative discounted cash flow at year 3 end is $ 64427.42. So payback period is between 2 years and 3 years.

Particulars

Amount

Cumulative cash inflow at year 2 end

a

44581.62

Cash outflow at Zear 0

b

60000

Difference ( b-a)

c

15418.38

Cash inflow for year 3

d

19845.81

Period in years (c/d)

0.78

Answer: So Project’s discounted payback period is 2.78 years ( 2 years + 0.78 years)

Figures in $

Year

Cash inflow

Disc Rate - 8%

Disc. Cash inflow

Cumulative Disc. cash inflow

A

B

A*B

1

25000

0.93

23148.15

23148.15

2

25000

0.86

21433.47

44581.62

3

25000

0.79

19845.81

64427.42

4

25000

0.74

18375.75

Discounted cash inflow

82803.171